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Tax Resolution & Representation
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When a Notice of Deficiency (NOD) is issued by the Internal Revenue Service, you have 90 days to file a United States Tax Court Claim. A NOD is issued for many reasons. Usually a NOD is issued after an audit or an appeal of an audit. For instance, if you were audited by the IRS, and you disagreed with a position the auditor took, you would have 30 days to appeal the decision. If your position is not agreed to in appeals, the IRS will issue a NOD. Once the NOD is issued, you have 90 days to petition the United States Tax Court to hear your case. In order to petition the United States Tax Court, you need to fill out a petition, enclose your NOD, request where you want your trial to be heard, and pay a $60 filing fee. Most cases that go to U.S. Tax Court are pro se, meaning the taxpayer represents themselves. Only an attorney or someone that has been granted permission by the U.S. Tax Court can represent you. That isn’t to say that your accountant can’t go with you to court. In fact, the court applauds this. They just can’t represent you without you being present, and they cannot negotiate or agree to terms on your behalf.
A taxpayer must meet three requirements for filling a petition in Tax Court:
A taxpayer may elect the “small tax case” procedure, known as S case procedures, for cases involving up to $50,000 in deficiency per year (including penalties and other additions to tax, but excluding interest). In rare instances, the Tax Court, on its own or in granting the Service’s motion, can remove S case designation.
Special trial judges hear S cases. The cases can be found at the Tax Court’s web site www.ustaxcourt.gov. Taxpayers cannot cite them as precedent (Sec. 7463(d)). S cases have advantages; they are less formal, and can be heard in many more cities than regular cases.
S cases also have disadvantages; they are final, without appeal. Further, taxpayers lose S cases more often than regular cases. This is attributable to the nature of cases brought, as well as the lack of solid support to overcome the “burden of persuasion” imposed on the taxpayer. Of 99 Tax Court Summary decisions for S cases issued between January and June 2001, taxpayers were pro se in 88 cases, and won only five outright (none with attorney representation).
When filing a Tax Court petition, the taxpayer should be aware of the differences among venues. The Tax Court may be preferred over the District Court or Court of Federal Claims because it is the only court in which a taxpayer does not have to pay a deficiency prior to filing a petition. Other courts have discovery rules that can make litigating cases expensive and time-consuming. Despite this, there are times when taxpayers should avoid Tax Court.
For certain types of cases, Tax Court can be a hostile forum, while District Court or Court of Federal Claims can be “friendlier” Claims Court is only appealable to the Federal Circuit, which can be an advantage when the regional Appeals Court is known to be hostile to a taxpayer’s case. Trial by jury is available only in District Court.
Typically, a taxpayer would avoid Tax Court S case status if his case involved contingent fees withheld by an attorney as income to his client. The Tax Court consistently rules against taxpayers on that issue. The taxpayer would have no appeal rights.
The IRS District Counsel’s office handles Tax Court cases. Paralegals usually handle S cases. The Tax Division of the Department of Justice or the United States Attorney’s office handles District Court and Claims Court cases, an advantage when a completely new team reviews a marginal government case. Appeals does not observe the prohibition against ex-parte communication with other Service employees in docketed Tax Court cases.
When there is a possibility that the IRS can raise new issues, the Tax Court may not be the proper venue. The statute of limitations (SOL) is suspended while a case is pending in Tax Court. Therefore, the Service can raise new issues, which may increase the deficiency. In addition, after litigation is over, the limitations period is still open for certain assessments. Further, except for S cases, the Tax Court can determine a deficiency in excess of the amount the IRS claims. Filing a petition after expiration of the SOL is possible when the case is in District Court or Claims Court, where new issues are limited to reducing the refund claim.
We have filed about a hundred Tax Court petitions for our clients, and have gone with them when they have had their case heard, and represented their interests. Typically, before the case goes to court there is a pre-trial conference where most issues are settled. All of the cases I have taken to court have been settled in this pre-trial conference. All of the court’s decisions are public record, so everyone will know what is going on with your case, so you have to know that going in.
All in all, going to court is not a bad option only if you have to go. It is not something that you go to first. Typically, you should go through the proper channels of appeals first. In appeals the IRS is more apt to settle a case because they weigh something called the “Hazards of Litigation.”
I have met with a lot of clients this year, and there is a growing trend that most people need to be made aware of. For some various reasons (we will get into them later), workers are being misclassified. This seems to happen more in the creative industry, but it is making its way into the main stream. This is a misunderstanding by employers of the rules, and can cost you several thousands of dollars. However there is a remedy. So, the story goes that you get hired as “temporary help,” with a company. As I said, it is usually in their creative department, but it is starting to seep into other fields. An employer will hire you and treat you as an independent contractor. After a few months, that SAME employer will hire you on as an employee. There are SEVERAL reasons why this is bad for you.
First of all, the IRS takes the stance that if you work under someone’s direction, you are paid by the hour or by the piece, if you use your employer’s equipment or tools, you have set hours that you are supposed to work, then you are considered an employee of that company. NO QUESTIONS ASKED. For instance, you go to work for a company in an office setting. You have to be at work at 8:00 am and you leave at 5:00 pm. The company provides you with a desk, a computer, and other equipment, you have a boss or a supervisor that you report to, and you get scheduled breaks, you are that company’s employee. The reason that an employer doesn’t want to classify you as an employee is that they are responsible for half of your Social Security and Medicare Tax, they have to pay both Federal and State Unemployment, and you might be eligible for benefits. So, what happens is that they pay you as an independent contractor, not withholding any taxes, and thus are not responsible for any employer related taxes on what they are paying you. They don’t have to pay you overtime, and they don’t have to pay you any benefits if the company has benefits. All of this is fine until you have to pay your taxes.
In this situation, you receive a 1099-MISC with an amount reported in the Non-Employee Compensation box. Employers now a days call it “freelance” work. You have to, not only pay income tax, but you have to pay 15.3 percent in Social Security and Medicare Taxes. If you were an employee, you would only be responsible for 7.65 percent of Social Security with the additional 7.65 percent paid by your employer. Because your employer misclassified you as a self-employed individual, YOU are responsible for all of these taxes. . If you are in the 15 percent tax bracket, you could be paying upwards of 30 percent in income taxes. What makes matters worse, is after this “probation period,” your “employer” will then bring you on as an employee. As I see this more and more, I cringe. Do these employers have accountants?
Let me tell you what the IRS says about this. First of all, with the rules I mentioned before about your work conditions, the IRS will classify you as an employee. But there is more. If that wasn’t reason alone for the IRS to reclassify you, if your employer has hired you on as an employee after this probationary period, the IRS will certainly reclassify you. The IRS’s position is that once your employer considers you an employee, you are ALWAYS an employee. This whole situation begs the question: Why is this going on so much? The answer is, I don’t know. Perhaps one employer is doing this, and other employers see that they are getting away with it so they are following suit.
What should you do if this is happening to you? Very simple. When you file your tax return in April you file Form SS-8 with your tax return, and let the IRS determine your employment status. On your tax return, you will be responsible for ½ of Social Security and Medicare, but the IRS will go after your employer of the additional amount. I do want to caution you on something; you should only file this form if you are no longer working for that employer. Filing this form will, almost, certainly get you fired. When you file this form the IRS will launch a full investigation of your employer, and that is not pretty. The employer will not only be responsible for paying their share of Social Security and Medicare, they will be hit with a 100 percent Trust Fund Penalty, for misclassifying you in the first place. This may seem farfetched, but I file, at least three of these forms a year. Never once have I had the IRS come back and say that my client was wrong.
If this is going on with you now, or has gone with you, and you want to fight back, give us a call at 1-855-IRS-2-911, or email us at firstname.lastname@example.org. Let YOUR Voice Be Heard®
IRC §6672 states the following:
(a) General rule.
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
Now we enter the case of William R. Shore v. U.S. A district court has denied a refund of a responsible person penalty that had been paid by the owner of a company who had delegated duties to a manager who ended up embezzling funds from the company. While the court sympathized with the owner, it found him liable for the penalty because he was a responsible person and he paid unsecured creditors after learning of the manager’s failure to pay IRS.
In determining whether an individual is a responsible person, courts consider factors including such as whether the taxpayer served as an officer of the corporation or a member of its board of directors, owned a substantial amount of stock in the company, participated in day-to-day management of the company, determined which creditors to pay and when to pay them, had the ability to hire and fire employees, or possessed check writing authority. Not every factor must be present, instead, a court must consider the totality of the circumstances to determine whether the individual in question had the effective power to pay the taxes owed.
William Shore (Shore) owned real property (the property) that he leased to Countryside Repair & Equipment (Countryside), a farm equipment seller, until late 2004 when Countryside closed. At the time Countryside ended its lease with Shore, a representative for McCormick Tractors, a line of tractors sold by Countryside, proposed that Shore start his own business on the property and become a McCormick dealer. Shore was initially uninterested because he was retired and lived far away. The McCormick dealer then suggested the manager of Countryside, Tom Lewis (Lewis), had 25 years of experience buying and selling tractors and could run the business for Shore.
Shore met with Lewis and ultimately decided to form Bear River Equipment, Inc. (BRE). Shore and Lewis verbally agreed that Lewis would run the business and have the option to purchase it at any time by repaying Shore’s initial $150,000 investment in the company with interest. Both parties believed that Lewis would eventually purchase BRE.
Pursuant to their verbal agreement, Shore hired Lewis to manage every aspect of the business, including day-to-day operations, financial management, purchasing of product lines, paying all of BRE’s bills, and other duties required to run an equipment sales business. Lewis was responsible for supervising, hiring and firing employees, as well as for submitting all tax forms for BRE and paying its payroll taxes. Shore viewed his role in BRE as an investor, and essentially treated the company as if it belonged to Lewis. Lewis and his wife also treated BRE as their own company and held themselves out to others, such as an accountant they hired to work for BRE, as the owners of the company. However, Lewis never exercised the option to purchase BRE.
Shore played a very limited role in the operation of BRE. But he signed the Articles of Incorporation as President of BRE, owned all of its shares, signed various contracts on its behalf as its president, and personally guaranteed an operating line of credit eventually obtained by BRE from a bank. Shore spoke by phone with Lewis once or twice a month to discuss operations and made quarterly visits to BRE to check inventory and generally assess the business. Shore also reviewed balance sheets and annual statements Lewis sent him for BRE.
Shore eventually noticed unpaid payroll obligations from 2005 and directed Lewis to pay them. Shore ensured Lewis paid the payroll obligations from 2005 by the January 2006 deadline. Shore had authority to sign checks on the bank account, though he did not write any checks on the account, and was listed on the check signature card as owner of BRE.
In August 2007, Shore received notice from IRS that there were serious issues with BRE’s employment taxes for 2006 and 2007. This was the first time Shore became aware that BRE’s 2006 and 2007 payroll taxes had not been paid. Shore subsequently learned that Lewis had been embezzling from BRE, failing to pay creditors or pay BRE’s taxes, and stealing BRE’s assets. Upon discovering Lewis’ fraud, Shore fired him and took over management of BRE. Shore ultimately decided to close BRE because he believed he could not pay all of the liabilities and contribute sufficient working capital to keep the company going. Before doing so, however, he allowed more than $120,000 from BRE’s checking accounts to be paid to unsecured creditors other than the U.S. Although Shore believed he should not be held liable for BRE’s unpaid payroll taxes because he was not a responsible party and did not willfully ignore tax obligations, he paid $101,583 in trust fund recovery penalties to the U.S. and later filed the instant suit to obtain a refund.
Here is the law, if you have a business and you have control of that business as an officer, shareholder, or make day to day decisions for a business, and you don’t pay payroll taxes, the IRS can access a Trust Fund Penalty against you personally. Not paying your payroll taxes, is in fact embezzling money from the United States Treasury Department. Because a corporation can go out of business, and wipe its debts clean, the IRS will issue a Trust Fund Penalty to protect the government’s interest and make sure that the amount will be paid back to the government.
The mistake that Shore made was that when he learned of the embezzlement of funds and the nonpayment of the payroll taxes, he paid unsecured creditors instead of paying the IRS. The court concluded that the undisputed evidence established that Shore was a responsible person under Code Sec. 6672 . First, he was BRE’s president and signed contracts on its behalf as its president, including inventory agreements BRE needed in order to obtain the farm equipment it sold, and Shore also personally guaranteed such contracts. Shore also signed on BRE’s behalf and as its president when BRE opened a line of credit, which Shore personally guaranteed. Further, Shore was BRE’s sole shareholder. He thus had the effective power to change the company’s employees and thereby direct the business of the corporation. Shore also possessed, but did not utilize, check writing authority on BRE’s account with Ireland Bank.
Shore didn’t manage the day-to-day operations of the company or, at least while Lewis served as manager of BRE, determine which creditors to pay and when to pay them. However, Shore had monthly telephone calls with Lewis to discuss the business, made unannounced visits to BRE to assess inventory, and reviewed BRE’s financial statements.
When he learned that Lewis had not satisfied payroll liabilities in 2005, Shore called Lewis and ensured such liabilities were paid. Shore thus had the authority to order the payment of delinquent taxes. Thus, despite delegating his authority to Lewis and permitting him to run BRE’s daily affairs, Shore remained a responsible person because he had effective control of the corporation and the effective power to direct the corporation’s business choices, including the withholding and payment of trust fund taxes.
Shore was also ultimately responsible for hiring and firing Lewis.
The undisputed facts conclusively established that Shore possessed the status, duty, and authority necessary to be a responsible person under Code Sec. 6672 , as evidenced by his title, stock ownership, check writing authority, his ability to ensure that the 2005 payroll taxes were paid upon learning they had not been remitted, his authority to force the Lewis’s out of the business, and, perhaps most importantly, the fact that Shore ultimately took complete control over BRE once he learned of the tax liability. Therefore, the court found Shore was a responsible person as a matter of law. Even if you have directed an employee to make the payments to the IRS and they fail to do so, you could be held liable like Mr. Shore.
The question would arise: why doesn’t the IRS go after Lewis for his failure to pay the payroll taxes? Very simply, they determined that they could get the money out of Shore and not Lewis. Does Lewis have some responsibility? Yes he does. If this had happened where Shore never had any idea of what was going on, and the IRS came in to assess the Trust Fund Penalty, they would have probably assessed the penalty against Lewis as Shore had no idea that the taxes had not been paid.
When dealing with payroll taxes, the IRS doesn’t play around. Be very careful. If you find yourself in a similar situation, give us a call at 1-855-IRS-2-911.